The Union Cabinet approved a revised Double Tax Avoidance Agreement (DTAA) and the Prevention of Fiscal Evasion with respect to Taxes on Income between India and Cyprus.

The revised DTAA provides for source-based taxation of capital gains on transfer of shares instead of one based on residence.

Thus, it is considered as a major step in the fight against tax evasion, round tripping and base erosion/profit shifting. It also allows India to have the right to tax capital gains arising in India.

It further removes distortion caused by the provisions in the earlier treaty for residence-based taxation for the sake of avoiding tax.

Background

India and Cyprus had signed DTAA in 1994. Cyprus is a major source of foreign funds flows in India. From April 2000 till March 2016, India received foreign direct investment (FDI) to the tune of Rs 42,680.76 crore from Cyprus.

Cyprus is considered a major haven for money laundering, round-tripping, and profit-shifting. The revised DTAA assumes significance coming soon after the signing of the revised pact with Mauritius.

What is Double Taxation Avoidance Agreement (DTAA)?

A DTAA is a bilateral economic agreement between two nations that aims to avoid or eliminate double taxation of the same income in two countries. It is also referred to as a Tax Treaty.